Bank failure plan key to regulatory reform

DAVOS, Switzerland (Reuters) - A bank-funded safety net to absorb large failures could help shield markets and rebuild trust in the financial system, but regulators backing the idea will need to strike a delicate balance.

Finding a solution to the "too big to fail" debate is the main outstanding regulatory headache yet to be addressed in a bid to overhaul the financial industry after the crisis.

But informal talks in the Swiss mountain resort of Davos showed that while banks and regulators agree on the need to build shock absorbers and toughen capital rules to curb bank risk, finding a consensus on how to limit the potential cost to taxpayers of emergency bail-outs could lead to critical delays.

"We need living wills or resolutions," European Central Bank President Jean-Claude Trichet said at the World Economic Forum.

"We have to strengthen infrastructure in order to minimize the fallout of a collapse. It is very complex and multidimensional and we have to work a lot."

Bankers attending the forum said rulemakers and the industry agreed there was a need for a wind-down mechanism for banks, but there was no consensus on what this should look like.

RESCUE FUND?

One controversial new idea debated at behind-the-scenes talks during the annual gathering was the possibility of creating a so-called "resolution fund" to manage crises at large institutions whose troubles could unsettle the broader system.
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